1Th eory of the Dealership by Carlos Mora with Kurt Crisman, Jeff Walter How well can an organization measuur dealer behavior, discover and communicate problems, and coordinaat solutions? How effectively can manufacturers and dealers use this information? The extended enterprise can identify low-and high-performing dealers by their bottom line, but gainiin insight into why dealers perform as they do and increasing their performaanc proves to be more diffi cult. Comparing music and dealer channne performance provides insight into a theory of the dealership that can inform managerial decision-makinng When creating music, composers arrange different notes to create a composition. Each composer strives to create a masterpiece that will be performed with consistent, desirable results, but several attributes introduuc variation into each performance of the composition. • Music based on multiple voices, themes, and complex forms • Many performances by many differeen orchestras and musicians • Performances potentially affected by wide range of factors (location, musician skill level, instruments, etc.) • The composer does not directly particiipat in most performances These factors should sound somewhat familiar to a manager of dealer operatiion or the large, independent channne of another knowledge-intensive business. The attributes of these channeel include: • Complex products with many moviin parts (physical or virtual) and different models or confi gurations, like an automobile. © Latitude Consulting Group 888-577-2797 www.latitudecg.com EXECUTIVE SUMMARY Automotive manufacturers face many challenges when evaluating and optimizing the performaanc of their dealership channel. Comparing music and dealer channel performance provides insight into a theory of the dealership that can inform managerial decision-making. A theory of the dealership would identify the critical variables in all areas of interest and how those variables impact business goals. Latitude’s channel optimization framework provides a structure to develop and apply a theory of dealership by making technology investments that identify and manage critical operational variables. White Paper 2 © Latitude Consulting Group 888-577-2797 www.latitudecg.com • Many sales and service transactions performed by many different dealersship and dealer staff. • Dealership performance dependent on a wide range of factors (location, skill level of technical workforce, dealership systems and processes) • Corporate staff do not directly manaag dealership owners or staff Traditionally, automotive manufactureer and other organizations with large partner channels have built fi eld organizaation to control performance variatiion If musical composers adopted a similar approach, they would send assisttant to advise each orchestra. Howevver this approach does not address all the noise that can affect performance. • Composition may be fl awed • Composition not the right fi t for most orchestras (wrong mixes of instrumments skills of musicians) • Misunderstandings occur to varyiin degrees between advisors and orchestras Substitute composition for dealer performmanc or operational plan, and substitute advisors for fi eld staff and orchestras for dealerships. Again, the similarity is apparent. Note that the fi rst two items relate to a problem with the original composition or plan, and the last item relates to the execution of that plan. With this approach, performaanc at some dealers may sound OK, but without additional control, there is still a lot of noise in the channel and strategic objectives are not met. Composers, however, do not employ advisors to monitor orchestras. They can achieve their desired quality, becaaus they understand music theory, which provides a structure to analyze, understand, compose, and perform music with predictable, consistent resullts • The theory establishes rules that eliminate trial-and-error compositiion so a wider range of options can be considered and composed without playing. • Musical notation captures the rules of the theory and represents the composition in a musical score that establishes a single point-of-truth for composer and orchestra • Theory provides the basis for methodollogie that train musicians in general and instrument-specific skills required for a composition • Applies equally to all composers, musicians, and instruments Music theory works because it embodiie scientifi c theories of sound and physics that explain the interdependenncie between different waveforms. Those in charge of dealer operations do not have a dealership theory becaaus all the interdependencies of all the relevant variables in the life of a dealer have not been discovered. What the extended enterprise needs is a good theory that provides a structuur to analyze, understand, control, and optimize partner channels. LATITUDE CONSULTING GROUP WHITE PAPER Th eory of the Dealership3 © Latitude Consulting Group 888-577-2797 www.latitudecg.com Developing the Th eory In automotive manufacturing, fi nal inspection was the dominant model for quality control until it was demonsttrate that it made more sense to focus on the processes. It is easier to locate the true cause of a failure, or potential failure, in the process rather than in the fi nal product. Returning to the musical composition metaphor, music theory provided the structure to understand what sound will result from process—playing a particular single note, combination of notes, or sequence of notes. A theory of dealership would establish rules and identify patterns in the interdependenncie among channel activities that optimize performance. While a single organization is unlikely to develop a comprehensive channel theory any time soon, it can develop a model to understand what rules and patterns apply to its own channel. The extended enterprise can use an understanndin of the rules and patterns to make valid inferences about the effectiivenes of the activities; they can know where to improve and how to allocate resources and effort. Statistical Methods In the manufacturing industry, Six Sigmm and Just-in-Time (JIT) production were two developing concepts that improove quality (Six Sigma) and reduced costs (JIT). Six Sigma is a measurement of process quality using statistical proceddure to continually improve manufactturin processes. Both Six Sigma and JIT continue to signifi cantly impact the automotive industry and can be appllie to dealer operations. By leveraggin statistical process improvement lessons from Six Sigma and effi cient assse management from JIT, automotive manufacturers can improve business results for both the automotive manufactture and its dealers. A structural equation model (SEM) proviide one statistical method. Building a structural equation model involves measuring all the factors that might affect a performance metric and then bringing their joint effect together usiin advanced statistical methods. The resulting model provides coeffi cients for each measured factor that describe how much the factor impacts the relevvan performance metric. One Causal Network—A Study One automotive dealership study contained a detailed analysis of an evaluation system used by an automotiiv manufacturer to measure dealer compliance to the manufacturer’s standards. Independent of the compliannc scores, the study obtained eight dealer performance measures, includiin unit sales, part sales, market share for two different vehicles, and custoome satisfaction with the sales, parts and service departments. Out of more than 107 items used in the manufacturrer’ dealer evaluation system, only 17 showed consistent relationships with business results. This analysis provides an example of a disconnect between assessment instruments and the dealer performance measures they are purported to improve.4 © Latitude Consulting Group 888-577-2797 www.latitudecg.com The relevant items could be grouped into three categories: • Certifi ed training. (Non-certifi ed training did not appear to affect dealership performance) • Social capital (participation in professsiona organizations) • Anticipatory behavior. (For examplle prior to arranging a service appointment, a service manager verifi es that a required part is in stock and orders it if it is not.) Applying the Th eory Latitude Consulting Group developed a strategic framework based on the key fi ndings of the dealer study to develop and apply a dealership theory for a specifi c channel. The framework integrates fi ve areas of dealer channel optimization with knowledge transfer at the foundation and clearly-defi ned performance objectives at the peak. Causal Network A key tier of this framework is the notion of the causal network. At this step, an organization uses statistical methods like SEM to develop a theory of dealership for its channel. Dealer management systems, evaluation systeems and other sources can provide data for the statistical analysis. The results provide the basis for a theory, a causal network that maps how different dealership activities affect each other and the performance objective. Based on the results, the organization can ‘compose’ a plan to achieve the desiire performance objective. Making Technology Investments The lower tiers a modular approach that helps identify where the theory can be applied through selective informmatio technology investments that will yield the greatest benefi t to the channel operations. • A balanced scorecard tracks performmanc and provides a single point-of-truth between the organizaatio and all its dealers. Organizattiona performance objectives are tied to the actions dealer staff need to take. • A channel portal with single signoo and common processes and data provides the best instruments for uniform operational effi ciency. Portal applications may be developpe for both enterprise-dealer and dealer-only processes. • Knowledge transfer through an extennded enterprise-wide learning and certifi cation system ensures that dealer staff can easily acquire the understanding and information they need to take action and meet objectives. 􀀤􀁂􀁖􀁔􀁂􀁍 􀀯􀁆􀁕􀁘􀁐􀁓􀁌􀀁 􀀣􀁂􀁍􀁂􀁏􀁄􀁆􀁅 􀀴􀁄􀁐􀁓􀁆􀁄􀁂􀁓􀁅 􀀰􀀦􀀮􀀁􀁂􀁏􀁅􀀁 􀀱􀁂􀁓􀁕􀁏􀁆􀁓􀀁􀀱􀁓􀁐􀁄􀁆􀁔􀁔􀁆􀁔 􀀤􀁉􀁂􀁏􀁏􀁆􀁍 􀀱􀁐􀁓􀁕􀁂􀁍 􀀤􀁉􀁂􀁏􀁏􀁆􀁍 􀀱􀁆􀁓􀁇􀁐􀁓􀁎􀁂􀁏􀁄􀁆 􀀱􀁂􀁓􀁕􀁏􀁆􀁓􀀁􀀰􀁏􀁍􀁚 􀀱􀁓􀁐􀁄􀁆􀁔􀁔􀁆􀁔 􀀬􀁏􀁐􀁘􀁍􀁆􀁅􀁈􀁆 􀀵􀁓􀁂􀁏􀁔􀁇􀁆􀁓